Inner-city apartment prices could be affected by a wave of new properties coming onto the market at the same time as some off-the-plan buyers struggle to settle on their purchases, Standard & Poor's says.
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The credit ratings agency has highlighted fears of an oversupply of apartments in Melbourne and Brisbane especially, alongside "settlement risk", caused by tougher bank lending rules.
Despite the commentary, which comes after the Reserve Bank warned about the risks to bank loans of property developers building apartments, S&P said it did not expect an increase in home loan defaults.
Reserve Bank figures, published on Tuesday, also showed further slowing in housing credit growth in the year to April, led by weaker growth in lending to investors.
Amid an apartment building boom in many of Australia's biggest cities, S&P analysts said in a report published on Tuesday that the balance between supply and demand for property, appeared to be narrowing, especially in the apartment market.
"There is growing concern over the large volume of new unit stock coming onto the market, in addition to the already-existing supply, particularly in inner-city postcodes. This is more pronounced in Melbourne and Brisbane," the S&P report said.
Settlement risk increases
The new units will be coming onto the market at the same time as banks have tightened their lending to property investors, especially those from overseas and buyers of high-rise apartments.
Many banks are requiring investors to stump up bigger deposits, which raises "settlement risk" if off-the-plan buyers had assumed they could get a bigger loan when they put down their 10 per cent deposit.
"This is of particular concern for off-the-plan developments, which have a lag between the contract being signed and final settlement. Property prices could be affected, particularly if new units coming up for settlement are in competition with existing supply," S&P said.
Moody's also said last week that settlement risk had increased because of a fall in inward investment in residential property from China.
Westpac, ANZ Bank, Commonwealth Bank and National Australia Bank have all in recent months tightened or stopped lending to overseas buyers, who tend to be big buyers of off-the-plan apartments.
Banks also cracked down last year on lending to domestic property investors, in response to the Australian Prudential Regulation Authority's 10 per cent cap on housing investor credit growth.
Figures from the RBA on Tuesday showed housing investor credit growth slowed to 6.5 per cent in the year to April, from 7.1 per cent.
ANZ Bank economists said the slower growth in mortgage lending would be welcome news to officials who had been concerned last year about the market overheating, especially as the May interest rate cut was likely to stimulate the property market.
Mortgage risk
Lending to owner-occupiers rose to 7.3 per cent, while business credit also strengthened, lifting to 7 per cent, its quickest annual pace since early 2009.
The Reserve Bank also said in April there was potential for banks to make "large losses" from soured loans to property developers, amid concerns of a looming glut of apartments in parts of Sydney, Melbourne and Brisbane.
Even so, the latest round of financial results showed low levels of mortgage stress, despite some lift in troubled loans in mining areas.
S&P's report, an annual overview of the market for mortgage bonds, which lenders issue to raise money, says the proportion of mortgage borrowers falling behind on their repayments has drifted higher for the past five months, especially in mining states Western Australia and Queensland.
The rise in arrears was the result of mining workers moving into lower-paid jobs, it said, adding that as the jobs market was "relatively stable" it did not expect higher arrears to translate into a rise in mortgage defaults.
